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BZx
Basics * DeFi * Decentralized margin lending protocol on the Ethereum mainnet. bZx is a financial primitive enabling shorting, leveraging, lending, and borrowing. * Founded in 2017, U.S.-based BZx developed a protocol on the Ethereum blockchain that powers decentralized margin trading with ultra-fast settlement times for the 60+ tokens supported by on-chain liquidity protocol, KyberNetwork. BZx sees the partnership with Chainlink as a key step in its vision of ushering in a new generation of decentralized exchanges and says that Chainlink opens a wider range of integrations, such as real-time pricing. Announced: November 2018 * Part of the WBTC community (still as of 8-2019) * Part of the DeFi Network * Created Torque; "DeFi platform for fixed-rate, indefinite term loans." DAO * bZx announced (16-1-2020) that they are transitioning to a DAO governance model: The Trias Politicas There is a rich history of experiments in governance going back hundreds of years in the form of liberal democracy. These experiments show that the most enduring and stable governance structures have both checks and balances. Instead of reinventing the wheel, we have reinterpreted it in the context of the blockchain. As with most systems of governance in the real world, the DAO has three main branches: the legislative, the executive, and the judicial. The Legislative'' is a variant of liquid democracy with representatives elected by token holders staking BZRX. The three representatives with the highest number of tokens staked to their address become the legislature. At any point, token holders can change the representative(s) to whom their tokens are staked, but they cannot directly vote on proposals. Proposals passed by this branch must pass by a majority vote.'' The legislative branch approves upgrades to the protocol and sets the critical parameters: * the margin maintenance covered by the insurance fund, * the assets supported by the protocol, * the percent of interest collected from lenders, * the coefficients of the interest rate model, * the minimum staking time for token holders, * the rate of inflation of the BZRX token, * and the distribution of BZRX tokens minted via inflation. The tokens can be distributed to representatives, token holders, or through grants. A consequence of there being only three representatives in a system requiring majority rule is that an attack on the DAO requires at least 2/3rds of the active voting power. To pass a resolution, votes must be signaled twice, and between each signal at least 16 hours must elapse. This prevents a representative from making even a single finalized vote without the full consent of their stakers. The Executive'' is composed of the two leads of the core development team. The members of the executive branch will not always be part of the original core development team. Representatives may submit proposals to elect new executives. However, since this requires the vote of the executives themselves, the model resembles a Web of Trust. Much like the executive branch in traditional political systems, the executive has no power to propose or pass proposals on its own. Instead, the executive is to simply act as a check on the legislative branch, vetoing malicious proposals and attempts by representatives to form cartels. By restricting the powers of the executive to ratifying upgrade proposals and inflation reward distributions, regulatory risk is minimized. In the worst case scenario, a regulator could prevent further upgrades to the protocol by apprehending the executive administrator keys. To mitigate this risk, executives can be replaced by an unanimous vote of the legislative. Replacement of the executive does not require approval of the executive.'' The executive has the ability to unilaterally pause the protocol for 48 hours, after which there is a 3 month refractory period before another pause can be invoked. If a serious security issue is found in the protocol, security researchers can disclose the vulnerability discretely to the executive, have the system paused, and then allow for the vulnerability to be disclosed to the legislature. If the legislature cannot mobilize a comprehensive response within that 48 hour period, the pause period can be extended through the normal governance process. The Judicial'' is the smart contract code and the EVM. Both branches can only act within the constraints of the smart contracts governing them.'' The Economics of Staking In order to begin earning staking rewards, token holders must deposit their funds into the governance contract and stake their tokens to a representative. Doing so entitles holders to staking rewards created through minting new BZRX tokens. If all token holders are staking to representatives, the result is that all holders maintain their overall share of ownership over the protocol. However, it is unlikely that all token holders participate in staking. The result of this is that the token holders participating in governance and staking to a representative slowly increase their share of protocol ownership while those not staking are slowly diluted. Staking rewards are effectively a tax on free riders and speculators that can be used towards sustaining protocol development and/or enriching existing token holders. Aligning The Incentives of Stakeholders It is anticipated that one of the first proposals the legislature and executive will pass is the ability for BZRX holders to redeem a given percent of BZRX for a proportional amount of the insurance fund. Since the health of the insurance fund is critical to the overall health of the protocol in every respect, this ensures that token holders have an incentive to choose representatives that steward the protocol parameters judiciously. If the insurance fund becomes excessively denominated in BZRX, token holders can vote to rebalance the fund. Since in most circumstances BZRX will be worth more than its redemption value, it is unlikely that the fund comes to be excessively denominated in BZRX. In the rare event that it does, token holders should rebalance the insurance fund when the market price of BZRX rises above the redemption price." Following are their proposed solutions on the problems they identified, which you can read about in Governance. "Solutions to Governance Participation Representative democracy prevents individual token holders from having to understand the minutiae of every governance proposal, reducing their decision down to the most qualified and knowledgeable representative – likely someone with a track record of activity and visibility in the community. Staking represents both a carrot and a stick at once. Inflation dilutes free riders neglecting to participate in the governance process, serving as a stick. Those same inflation rewards function as a carrot for those actively participating in the governance process. Along an extended time horizon, protocol ownership condenses completely in the hands of those participating in governance. Shadow Voters It is not possible to stop lending protocols from listing the BZRX token, nor is it possible to prevent attackers from staking BZRX tokens that have been borrowed from lending protocols. The only recourse against shadow voters is to force exposure to collateral, margin calls, and interest payments. This can be accomplished by requiring an extended minimum staking period. We propose an initial staking period of one year. This imposes, as much as is feasible, significant costs on shadow voters. This also has the dual purpose of both aligning the incentives of current token holders with the long term health of the protocol and also selecting for holders with a longer time horizon. Plutocracy As the tokens become unlocked and voting is weighted linearly, it becomes possible for a few large parties to collude with 66.67% of the tokens to loot the DAO. There are two safeguards against this. First, the executive branch can simply veto any malicious proposal to loot the DAO even if someone comes to own over two-thirds of the tokens. Second, if the executive branch collaborates with the attackers, any changes passed by both branches will be required to pass through a two day time lock, allowing protocol users to evacuate their funds. Undertaking such an action will have the effect of hurting the BZRX token price, serving as a deterrent to seizing funds. Cartels and Bribes The role of the executive is to disrupt rent-seeking cartels from establishing a Cournot equilibrium. The two powers of the executive are to veto protocol upgrades and inflation reward distribution proposals. If representatives pass a proposal that is cooperative rather than competitive, it is the purview of the executive to veto that proposal. One weakness of this model is that legislative cartels can collude with the executive by offering a bribe. The executive will rationally accept a bribe if: BV>ΔTV+ΔCV BV is the value of the bribe ΔTV is the resulting change in value of the tokens held by the executive ΔCV is the resulting change in value of the discounted future cash flow derived from the protocol An executive will be more resistant to accepting a bribe from the legislature the larger their existing stake in the token and the larger their stake in deriving revenues from the protocol. The value of BZRX tokens play an important role in the security of the protocol. It is important that DAO participants are forced to maintain exposure to the price action of the tokens after each vote. After every vote ratified by both the legislature and the executive, the staking period of every participant is extended by 24 hours. The system is secure if the value of the tokens held by all attackers exceeds the value held by the protocol. Since two thirds of the tokens are required to pass a malicious proposal, this means that the system is secure against a rogue executive so long as: TVLt+3>23TV TVLt+3 is the Total Value Locked 3 days after a malicious proposal passes TV is the value of all BZRX tokens If an attacker derives an income stream from the protocol independent of the token, the discounted value of these future cash flows should be added to the value of the tokens staked when calculating the cost of an attack. This means that participation by legislators or executives with a business built on the protocol increases the security of the protocol governance by reducing their incentive to cooperate with an attack." How Decentralized is it? * The following was written before the announcement about their DAO (see above) * Was classified Degree 5 DeFi ''on the HackerNoon rankings of 25-4-2019. "These DeFi products are non-custodial, have permissionless margin calls, permissionless provision of margin call liquidity, decentralized price feeds, and decentralized interest rate determination, but centrally control platform developments & updates."'' * A BIG side note, is that the blog was written by Kyle J Kistner who is Chief Vision Officer at bZx. He gave his own project the highest ranking. What a surprise. * From the comprehensive blog post: "Custody: bZx smart contracts are open source and non-custodial from the point of loan origination. Initiating Margin Calls: Anyone can initiate margin calls. The process is permissionless, decentralized, and incentivized. Margin Call Liquidity: Anyone can provide margin call liquidity through KyberNetwork. In the near future there will be ways to provide margin call liquidity through 0x or directly from the caller’s assets. Price Feeds: bZx uses KyberSwap’s secure, decentralized price feeds. Kyber aggregates information from Uniswap, Binance, Bitfinex, Huobi, and its own internal inventory. Kyber’s prices stay within predefined bounds in the absence of a price update from reserve managers, mitigating the potential for price feed manipulation.The KyberSwap price feed does not have a central point of failure. Interest Rates: Interest rates are determined by the market through an orderbook. Since each person is playing a role in setting interest rates, this is a completely decentralized mechanism for interest rate determination. Development: bZx is centrally developed by the team and the contracts are open source. The contracts are mutable but will be guarded by a 28 day time-locked multisig after the first major round of liquidations." Team * Kyle J Kistner; Chief Vision Officer Category:Companies/Organisations